Apple eyes trillion-dollar market cap

Apple, the maker of the iPhone, has reached heights never seen before, with its market valuation eclipsing $770bn.

Now worth more than the entire S&P 600 small-cap index, or two Berkshire Hathaways, the question for investors is whether the Cupertino-based technology behemoth can surpass the $1tn mark, a level never reached before.

Investors have thus far wagered it can, sending shares to a new all-time high this week. Analysts on Wall Street, too, have taken the view that Apple will if anything go higher, lifting price targets at a heady clip. Goldman Sachs increased its view to $145 a share last week - worth $845bn based on current share counts. The highest target, at $165 from First Shanghai Securities, would see Apple's market valuation rise to $960bn.

Accelerating iPhone sales, rising earnings forecasts, the largest buyback and dividend programme in the US and the prospect of new products - including reports of a car - have propelled shares up 19 per cent this year, adding more than $110bn to Apple's market valuation.

By contrast, the next 10 largest businesses on the S&P 500 have seen $67bn wiped from their valuations, including $10bn plus haircuts to Exxon, Microsoft, Procter & Gamble and Johnson & Johnson.

"It's possible in the next couple of years, and the reason I think that it has this potential is really because the multiple investors are willing to pay for [Apple] is expanding," James Gautrey at Schroders, says of Apple nearing $1tn.

He adds: "This was always viewed as a consumer technology, boom-and-bust cycle type of company, like the Motorolas, Nintendos, Nokias. Right now, the innovation Apple is coming out with - payments, healthcare, Beats [headphones] - those three parts for the consumer are really starting to lock people in."

<

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

Secular trends in the industry, including the shift to cloud computing, have also buoyed the company. "Apple's iOS platform is the primary beneficiary of the shift to mobile computing, similar to the 1990s when client server applications were built on Microsoft Windows and Oracle platforms," Deborah Koch, a portfolio manager of Northern Trust's technology fund, says.

This has prompted a re-rating of shares and the company's earnings potential. Analysts now project sales in the company's 2016 fiscal year will reach $237bn - 17 per cent higher than forecasts set one year ago. Next year's earnings are expected to hit $9.26 a share, up 44 per cent from 2014 levels and 29 per cent higher than year ago consensus projections.

"What's propelling [Apple] and ultimately the driver of the stock is that the company is beating expectations," says Andrew Slimmon at Morgan Stanley Wealth Management. "Earnings estimates . . . keep rising. The company is actually delivering on earnings better than the street expects and the stock has responded accordingly."

Apple's valuation has remained compelling because of its growth, investors add. The California company trades at 15.4 times 2015 earnings, below the 17.7 multiple ascribed to the broader S&P 500.

The company's brisk rise has, however, created a conundrum for investors benchmarked to the S&P 500. Apple represents 4.1 per cent of the market cap weighted blue-chip index, far more than any other constituent. Portfolio managers have had to hold at least that much to not be underweight the iPad maker, and those who have eschewed a position in the company have missed out on its gains. Conversely, a decline in the company's shares presents a potential risk.

Only five other companies have made up more of the S&P 500 at one point or another. IBM was the largest weight on the S&P 500 for six consecutive years, making up as much as 6.4 per cent of the index in 1985.

Excluding Apple, the S&P 500 tech index would be up less than 1 per cent since the year began, according to data from S&P Dow Jones Indices. The overall S&P 500's gain would be 55 basis points lower.

"If you run a diversified portfolio and you don't own Apple, you are taking a very big bet against it. That forces a professional investor into the stock," Mr Slimmon says.

Apple's buyback programme - prodded by activist investor Carl Icahn - has also acted as somewhat of a floor on its share price. Last year the company spent more than $56bn on buybacks and dividends, 6 per cent of the $900bn S&P 500 constituents put towards the returns, S&P Dow Jones Indices adds. The company's 1.4 per cent dividend yield, while lower than the 2 per cent offered from the S&P 500, has attracted investors searching for income as yields on the longest-dated US Treasuries hover near record lows.

Technology analysts with Credit Suisse expect Apple to lift its capital return programme to $202bn through 2017, including $37bn in dividends. Ms Koch says that move will probably attract more value investors to the company's stock as they seek out yield-bearing assets.

Despite the gains, there remains a cautious spectre to the dialogue with investors, many of whom remember the company's precipitous 45 per cent slide in 2012-13 as concerns flared that competitors were winning share. Other technology groups have after all made the march higher before sliding: Microsoft and IBM among them.

"While things look good now, they will at some point get into that funk again," says Bob Doll at Nuveen Asset Management. "If you have confidence, it is where you can make some money stepping in."

[email protected]

Twitter: @ericgplatt

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation